Adjustable rate mortgages (ARM), developed when mortgage interest rates were high, can help you finance the purchase of a home with low interest rates. An ideal choice for those who expect their income to rise or move in a couple of years, an ARM also increases your risk for higher payments. Fortunately, lenders also offer safeguards to limit some of your risk to excessively high interest rates.
ARM Features
An ARM starts with a low interest rate, up to 3% lower than a fixed rate mortgage. With lower rates, you usually qualify to borrow more than with a fixed rate home loan.
ARMs usually start with a fixed rate period and end with fluctuating yearly interest rates, increasing or decreasing your monthly payment. So a 3/1 ARM means 3 years of fixed rates with interest rates changing every year after that. Interest rates are based on an index, usually the rate on the T-bill or LIBOR, and the margin the lender adds to the index.
ARM Safeguards
In order to protect borrowers from sky-rocketing monthly payments, mortgage lenders put in place safeguards. For example, a point cap limits how much interest rates can rise monthly and over the life of the...
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